ETF Of The Week: Regional Banking ETF 'KRE'

Welcome to ETF Of The Week, a designation given to the most newsworthy or notable fund of the past seven days.

Financial crisis? What financial crisis?

On Tuesday, Congress voted to roll back significant portions of its 2010 Dodd-Frank banking law enacted after the financial crisis, in a move designed to ease the regulatory burden on small and regional banks. The legislation now heads to the president, who'll sign it into law.

The bipartisan bill will lift the threshold at which a financial institution is considered to be "systemically important," meaning its collapse would send shockwaves through the U.S. economy, just as Lehman Brothers' bankruptcy did in 2008. The new threshold is $250 billion in assets, up from $50 billion.

The higher threshold frees thousands of regional banks from the stiff capital and planning requirements a Democratic Congress imposed after the financial crisis, including regular "stress tests" designed to gauge financial institutions' ability to weather tough economic times.

Who Benefits

Smaller "community" banks have long complained that Dodd-Frank's requirements were too burdensome to meet. But the new bill won't just benefit the credit union on your street corner. Giants like Charles Schwab and American Express now fall below the new threshold.

The vote also exempts any bank with less than $10 billion in assets from the Volcker Rule, which prevents banks from investing their depositors' funds into risky assets like hedge funds and private equity. This could help the smallest banks realize even higher returns—and higher risks.

Several regional banking ETFs stand to benefit from the Dodd-Frank rollback, including the PowerShares KBW Regional Banking Portfolio (KBWR), the iShares U.S. Regional Banks ETF (IAT), and even the leveraged Direxion Daily Regional Banks Bull 3X Shares (DPST).

But the ETF most likely to benefit is the largest and most popular fund in the space, the SPDR S&P Regional Banking ETF (KRE).

Source: StockCharts. Data as of May 24, 2018.

KRE, which recently passed $5 billion in assets, has seen $461 million in new net money since the start of the year, inflows that far surpass those of its rivals.

The fund tracks an equal-weighted index of U.S. regional banks. As such, it tilts heavily toward small- and midcap names, with an average weighted market cap of just $9 billion. Inside KRE's portfolio are 120 stocks, including names familiar to many readers, such as Silicon Valley Bank, M&T Bank, SunTrust Banks and BB&T.

The fund has excellent liquidity, with 0.02% spreads and $366 million in daily traded volume. It has also seen strong performance: Year-to-date, KRE has risen 10.9%, whereas the SPDR S&P 500 ETF Trust (SPY) has only risen 2.6%.

KRE has exhibited strong long-term performance, too, rising 16.7% over a five-year basis. That makes it one of the top 50 highest-performing, nonleveraged ETFs over that time period. (SPY, meanwhile, has only risen 12.7% over the past five years.)

Though KRE rose slightly (about 1%) on the news of the vote, it has since shed most of those gains.

Contact Lara Crigger at [email protected]